TSX falls to 2-1/2-week low as banks drag

TORONTO (Reuters) - Canadian shares slumped to their lowest level in 2-1/2 weeks on Monday, led by financial stocks, after political uncertainty in Spain and Italy reminded investors that there were still many risks ahead for the euro zone.

Rising Spanish and Italian bond yields renewed worries about the euro zone crisis after Spain's prime minister faced calls to resign over a corruption scandal, while a probe of alleged misconduct involving an Italian bank was expected to widen three weeks before a national election. <MKTS/GLOB>

Banks were the biggest drag on Canada's main stock index. Toronto-Dominion Bank (TD.TO: Quote) slipped 0.7 percent to C$82.96 and Royal Bank of Canada (RY.TO: Quote) was down 0.5 percent to C$62.21.

"It seems like the EU issues have come to the forefront after a long time, or certainly for the first time this year. That's impacting the bank stocks," said Elvis Picardo, strategist and vice president of research at Global Securities in Vancouver.

Market players also noted that the financial sector was up more than 10 percent since November, prompting some investors to take profits in a seasonally weak month for bank shares ahead of quarterly earnings reports due later in February.

"From a global perspective and from a North American perspective ... all markets right now are overbought. It's time for a short-term pullback," said Keith Richards, portfolio manager and technical analyst at ValueTrend Wealth Management.

Richards added that the country's big banks were encountering significant technical resistance after a recent rally that took the index of Toronto's financial services stocks to its highest level since April, 2011.

The Toronto Stock Exchange's S&P/TSX composite index .GSPTSE ended down 51.21 points, or 0.4 percent, at 12,717.62. The index hit an intraday low of 12,668.81, its softest level since January 17.
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